Is DRH A Good Stock To Buy Now?

Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts usually don’t make them change their opinion towards a company. This time it may be different. The coronavirus pandemic destroyed the high correlations among major industries and asset classes. We are now in a stock pickers market where fundamentals of a stock have more effect on the price than the overall direction of the market. As a result we observe sudden and large changes in hedge fund positions depending on the news flow. Let’s take a look at the hedge fund sentiment towards DiamondRock Hospitality Company (NYSE:DRH) to find out whether there were any major changes in hedge funds’ views.

Is DRH a good stock to buy now? Hedge funds were cutting their exposure. The number of bullish hedge fund positions were trimmed by 2 recently. DiamondRock Hospitality Company (NYSE:DRH) was in 14 hedge funds’ portfolios at the end of September. The all time high for this statistic is 19. Our calculations also showed that DRH isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 66 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Richard Pzena - Pzena Investment Management

Richard S. Pzena of Pzena Investment Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. With all of this in mind we’re going to take a look at the recent hedge fund action surrounding DiamondRock Hospitality Company (NYSE:DRH).

Do Hedge Funds Think DRH Is A Good Stock To Buy Now?

At the end of September, a total of 14 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -13% from the previous quarter. By comparison, 18 hedge funds held shares or bullish call options in DRH a year ago. With hedgies’ sentiment swirling, there exists a select group of noteworthy hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).

More specifically, Pzena Investment Management was the largest shareholder of DiamondRock Hospitality Company (NYSE:DRH), with a stake worth $19 million reported as of the end of September. Trailing Pzena Investment Management was D E Shaw, which amassed a stake valued at $19 million. Millennium Management, Renaissance Technologies, and Two Sigma Advisors were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Pzena Investment Management allocated the biggest weight to DiamondRock Hospitality Company (NYSE:DRH), around 0.12% of its 13F portfolio. Tudor Investment Corp is also relatively very bullish on the stock, designating 0.06 percent of its 13F equity portfolio to DRH.

Seeing as DiamondRock Hospitality Company (NYSE:DRH) has faced declining sentiment from the entirety of the hedge funds we track, we can see that there lies a certain “tier” of fund managers that slashed their positions entirely by the end of the third quarter. At the top of the heap, Jonathan Litt’s Land & Buildings Investment Management sold off the biggest position of the “upper crust” of funds monitored by Insider Monkey, totaling about $27.5 million in stock. John Khoury’s fund, Long Pond Capital, also cut its stock, about $8.3 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest was cut by 2 funds by the end of the third quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as DiamondRock Hospitality Company (NYSE:DRH) but similarly valued. These stocks are Translate Bio, Inc. (NASDAQ:TBIO), GenMark Diagnostics, Inc (NASDAQ:GNMK), The Buckle, Inc. (NYSE:BKE), Re/Max Holdings Inc (NYSE:RMAX), Inseego Corp. (NASDAQ:INSG), Adverum Biotechnologies, Inc. (NASDAQ:ADVM), and New Frontier Health Corporation (NYSE:NFH). This group of stocks’ market valuations match DRH’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
TBIO 23 342432 -3
GNMK 25 297839 1
BKE 18 56050 1
RMAX 11 48168 4
INSG 11 19774 2
ADVM 30 413121 5
NFH 15 170005 0
Average 19 192484 1.4

View table here if you experience formatting issues.

As you can see these stocks had an average of 19 hedge funds with bullish positions and the average amount invested in these stocks was $192 million. That figure was $63 million in DRH’s case. Adverum Biotechnologies, Inc. (NASDAQ:ADVM) is the most popular stock in this table. On the other hand Re/Max Holdings Inc (NYSE:RMAX) is the least popular one with only 11 bullish hedge fund positions. DiamondRock Hospitality Company (NYSE:DRH) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for DRH is 33. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 32.9% in 2020 through December 8th and still beat the market by 16.2 percentage points. A small number of hedge funds were also right about betting on DRH as the stock returned 66.3% since the end of the third quarter (through 12/8) and outperformed the market by an even larger margin.

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Disclosure: None. This article was originally published at Insider Monkey.